The Innovation Report – how does the UK measure up?

Now in its third edition, the UK Innovation Report provides a clear overview of the UK’s innovation and industrial performance and how it compares globally. CIIP’s Dr Carlos López-Gómez explains what the report can tell us about industry trends, UK productivity and whether there is sufficient investment in R&D.

Tell us about the Innovation Report

The UK Innovation Report measures the UK’s innovation activity and its industrial performance in a global context. Compiled by Cambridge Industrial Innovation Policy, based at the IfM, it provides a clear and succinct overview of the key trends across UK industry.

It answers questions such as: Is the UK producing enough scientists and engineers? Are the government and private sector spending enough on research and development? And how does innovation translate into internationally competitive industries and well-paid jobs?

Released annually, the report brings together innovation and value-added indicators in a single place, in a concise and accessible format.

Each edition provides “deep dives” into specific sectors. The 2023 edition analyses the food and drinks and aerospace sectors providing a fascinating insight into the structure and performance of these key UK industries.

What makes the Innovation Report unique?

The report is one of a kind because it brings together multiple different sources of data on innovation – which are often only accessible to specialised audiences and challenging to navigate – in one centralised place.

Other countries (such as the United States, Germany and Japan) have resources like the report in their mandates as a tool for policy dialogue. We used to have something similar in the UK, but it was discontinued.

By curating these insights, the report provides an honest assessment of how the economy is going. It is designed to provide policy-makers with the evidence needed to best promote innovation in industry. And we’re delighted that since we began the report three years ago, many of our colleagues in government share it, comment on it and find it a useful tool.

What does the report tell us about innovation in the UK?

Outside the UK, there is a fundamental lack of awareness of just how strong we are as a manufacturing nation and how much innovative activity is taking place across sectors such as aerospace, pharma and automotive.

However, although new data suggests that we spend, on average, similar on R&D to other OECD countries, the UK is still way behind leading countries such as Korea, the US, Germany, Japan and Israel.

The report tries to bring attention to the interplay between these innovation inputs and the outcomes from an industrial perspective. This is because the value of our investment in science and technology can only be fully captured if it sustains a competitive and sustainable industry – one that provides well-paid jobs and helps to address regional imbalances.

The 2023 report looks closely at the food and drinks and aerospace sectors. Why is it helpful to have these “deep dives”?

Looking at specific sectors is like looking under the bonnet of the economy and helps us to understand the bigger picture of what is going on with the economy and why. It’s a failure of many analyses that we don’t ask these basic questions about why the economy is behaving as it is. Instead, we tend to use macroeconomic explanations – but the first question we should always ask is: Which sectors are struggling more, and which sectors are doing well.

The economy’s performance is really the aggregation of the sectors’ performance, and the report gives more detail about why the national figures behave as they do.

The deep dives into the aerospace and food and drinks industries have allowed us to talk to companies to understand their challenges and what the figures mean for their industries. And the fact that we are a technical institute means we can understand the trends and how this affects industry performance. This is at the heart of the report – to provide an understanding of innovation and how it relates to economic performance.

How did you bring together multiple sources of data?

We have a great team of analysts at IfM who analyse existing data sets from the UK and abroad and undertake the painstaking work of interpreting them.

We have consulted government analysts on data and who have been kind enough to check and comment and talk to us about their analysis of sectors compared to ours. We’ve also spoken to the National Institute for Science for Social and Economic Research, which has provided technical support to make sure our analysis is sound.

And finally, we’ve benefitted from all the companies who have inputted and provided reflections from their monitoring data and experience. We’re very grateful for their contributions.

How can the UK best manage the shift towards new technology trends to maintain and strengthen its supply chain competitiveness?

There is broad recognition that sustained innovation will only take place if we have sufficient support for technology diffusion. Many technologies are available on the market (or are close to being made available), but international experience suggests that firms – especially the smaller ones – are not always aware of the potential of new technologies or have the skills to integrate them.

The UK innovation strategy in 2021 explicitly talked about the importance of supporting technology diffusion. And across the world, many governments are stepping up investment to ensure that more firms are integrated into their technological ecosystems.

Did anything surprise you from this year’s data?

One surprise was the amount of innovation that is happening in the food and drinks sector. We often equate innovation with high-tech industries, but the reality is that all sectors have niches of highly innovative activities, and this is the same for food and drink.

Most people don’t realise that, within manufacturing, the sector provides the most value added to the economy (the largest share of GDP). But this depends on highly sophisticated supply chains, and a lot of innovative activities need to take place – not only now but in the future as well, because we will need to be more efficient at growing and processing food and reducing waste.

The data also serves as a good reminder of how important it is to think about how a sector contributes to our economy. For example, we might say that aerospace exports a lot – which is true. In contrast, the food sector might not export a lot because it mainly caters to a domestic market, but we can’t say one is more important to the UK economy than the other. They are very different in different ways. One provides an essential contribution to the trade balance because it is highly export-oriented, but the other is arguably vital to national security. So, we need this sector to be innovative, resilient and connected and to cater to the needs of the people.

What does the report tell us about what’s happening in different regions of the UK?

It is well known that there are large disparities between UK regions and countries – between London and the rest. These are large and widening: in 1999 labour productivity in Wales represented 65% of that observed in London; however, in 2019 Wales’ productivity was only 58% of that of London.

Regional analysis presented in the report confirms that these disparities are explained to some extent by the expansion of service sectors at the expense of higher productivity sectors, such as manufacturing.

The combined effect of losing higher value-added sectors at the expense of lower value-added ones is particularly striking in the South West, the region with the slowest labour productivity growth in the last 20 years. In particular, the loss of manufacturing employment reveals a missed opportunity in the East Midlands, North West, North East and West Midlands. In these regions, the decline of manufacturing imposed a penalty on productivity growth of one percentage point, on average per year, between 1999 and 2019.

What does the report tell us about how the government can provide better sectoral support?

Policy design requires a detailed understanding of sector trends. The report helps us to see that there needs to be more government capability to analyse sector performance, and how this relates to UK’s overall economic performance. This doesn’t necessarily mean that the government needs  to intervene more, but that the any decisions to intervene or not will be grounded in the realities of industries.

Download the UK Innovation Report